Snapshot Notes - November 8, 2006

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WEDNESDAY, NOVEMBER 8, 2006

PostCloseSummary

11/08/06 5:00 PM EST

After a semi-volatile morning of trading, the major indices settled into a low-volume drift heading into the noon hour. It looked like they were about to roll over and test the morning lows, then they spiked suddenly and news quickly followed that Defense Secretary Rumsfeld was stepping down.

It's often spurious to correlate stock price movements with news events, but this one was pretty clear. I'm not sure why such an announcement would have an impact, and I frankly don't care - what I do care about is that buying pressure came in soon after short-term indicators began registering some oversold readings.

Since Monday afternoon, I've been skeptical of the sustainability of further short-term price gains, and the action Tuesday afternoon and this morning reinforced that skepticism. Given the peak in momentum we saw late Monday, it would be unusual to see sustained new highs so soon, and it's not something I'm betting on - the chances for a breakout failure are too high.

Something that caught my eye after the close was today's reading in the Down Pressure indicator for the Nasdaq 100. Recall that this indicator is constructed by observing the daily point moves and volume flow of each component stock in the NDX. The indicator in an average of the percentage of total point moves that were down points, and the percentage of total volume that was down volume (i.e. volume in stocks that closed lower on the day).

Today the indicator closed in extreme overbought territory for the fourth time since the rally began this summer. Each of the other times coincided with a short-term momentum peak in the NDX, as it was not able to sustain further short-term gains, if any were to be had.

Also notable is the potential divergence in the longer-term averages in the bottom pane. We saw the opposite kind of divergence during the decline this summer, both of which are indicative of waning momentum on a more intermediate-term time frame.

With currently mixed short-term indicators and markets still apparently range-bound, I don't see much of an edge here either way and am sitting out at the moment. I'm not interested in trying to fade a move to new highs, but given the chart above, I am looking at a potential short if the NDX drops and holds under 1750 (futures are currently indicating a positive open based on CSCO's earnings release).

Have a great night and we'll see you tomorrow!

ApproachingTheBell

11/08/06 3:25 PM EST

While assigning cause and effect between news events and stock price movements is a tricky endeavor, it was pretty clear today when stock index futures began to spike higher just as the resignation of Defense Secretary Donald Rumsfeld hit the wires.

I'm not quite sure why that news would have such an impact on equities, but whatever the reason we saw a recovery this afternoon that took the Nasdaq 100 to new highs and the other indices close to their own. They have all been consolidating at those highs for the past hour.

Our short-term guides have not moved a whole lot in response (though the STEM.MR model did move out of oversold territroy), and if we see a bone-fide breakout in the S&P 500 to new highs, I will not try shorting into it. Given the momentum extreme we saw just two days ago, it would be unusual to see a sustained breakout already, so I would be on a heightened alert for a false breakout, but I'm not so confident of a failure that I want to risk being short into a market hitting new highs. I don't see an adequate edge here either way and am sitting out.

LunchtimeLull

11/08/06 12:25 PM EST

Volume has dropped off significantly over the past hour or so, and prices are drifting in a tight range with no clear bias.

Curiously enough, our short-term STEM.MR model has already cycled back down towards oversold. It did a similar thing in late October after hitting an overly optimistic extreme two days prior, which resulted in choppy prices for the next couple of days before the major indices attempted another push lower.

That's about as good a template as any here...I don't expect any short-term rally attempts here to be sustained, and the first solid oversold reading we get should bring in buyers for a bounce.

MidMorningOutlook

11/08/06 10:25 AM EST

Good Wednesday morning...We start the post-election session with a largish gap down open in the major indices and almost all sectors outside of oil in the red, though like with most large gaps, this one is already close to being filled.

I mentioned late Monday that when we see a peak in momentum, further short-term price gains are nearly always given back within the week. We have seen that over and over in the past few months - when the STEM.MR model has hit an "excessive optimism" extreme, any additional short-term gains were only temporary in nature.

That kind of behavior is what made me want to fade a move in the S&P 500 towards its October high yesterday, as waning momentum and the uncertainty of an election seemed like a good recipe to expect the gains tacked on from Monday's close to be given back.

With the weakness yesterday afternoon and this morning's gap, the major indices erased Tuesday's gains, and our shortest-term guides have come off their overbought extremes and are now mostly neutral. It's still early to expect another run at new highs to be sustained, and the first solid oversold reading should bring in buyers, so I'm looking for continued choppy conditions until we reach another set of extremes.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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